Retirement is always thought of as that period of enjoyment and fun, a reward for years of work. However, one large area of concern that might dampen this golden period is that of health care costs. As we grow older, so does our need for health care, and costs increase along the way. Understanding and planning for these costs are paramount to an enjoyable and secure retirement.
The following article investigates the landscape of healthcare costs in retirement, and will give you an idea of what to expect and how to manage these costs. We provide a deeper look at what determines healthcare costs, several healthcare options available to retirees, and consider how to plan and save for your future expenses. By the end of this article, you will be better equipped to plan for healthcare costs that might arise in retirement, setting you up for a more financially secure and carefree retirement.
The Reality of Healthcare Costs in Retirement
Before we start to wade in, it is important to first consider the big picture behind health care costs in retirement.
The Average Cost
According to recent estimates, the average retired couple age 65 in 2021 may need as much as $300,000 saved-after tax-to cover healthcare expenses in retirement. These estimates include premiums for Medicare parts B and D, supplemental insurance (Medigap), and out-of-pocket costs for doctor visits, prescription drugs, and other medical services.
Factors Affecting Costs
A number of factors affect your individual healthcare costs in retirement:
- Age at which you retired
- General health
- Family medical history
- Lifestyle choices
- Geographic location
- Type of healthcare coverage chosen
The Impact of Inflation
It’s important to remember that the cost of healthcare generally rises at a rate higher than general inflation. Over the past decade, healthcare inflation has averaged 3.5% annually, while general inflation stands at around 2%.
Understanding Medicare: The Basics
To the greater part of retirees, Medicare forms the backbone of their healthcare coverage. Let’s break down the basics of Medicare.
What is Medicare?
Medicare is a federal health insurance program that covers mainly people who are 65 years or older. It is made of several parts that include:
- Part A: Hospital Insurance
- Part B: Medical Insurance
- Part C: Medicare Advantage Plans
- Part D: Prescription Drug Coverage
Medicare Part A
Covers inpatient hospital stays, care in a skilled nursing facility, hospice care, and some home health care. Most people do not pay a premium for Part A because either they or their spouse paid Medicare taxes for a sufficient number of years.
Has a monthly premium-in 2021, the standard premium is $148.50, but may be higher depending upon your income
Medicare Part C (Medicare Advantage)
Replaces Original Medicare (Part A and B)
Offered by Medicare-approved private insurance companies
Often covers prescription drugs in addition to your health services; may have extra benefits not covered by Original Medicare
Medicare Part D
Adds prescription drug coverage to Original Medicare
Offered by Medicare-approved private insurance companies
Medigap Medicare Supplement Insurance
Sold by private companies to fill “gaps” in Original Medicare coverage
Can help pay some of the health care costs that Original Medicare doesn’t cover
The Hidden Costs of Healthcare in Retirement
While Medicare pays for much, it hardly covers everything. Some of the other out-of-pocket healthcare costs that could be incurred are listed below.
Deductibles and Copayments
-Medicare Part A deductible for hospital stays: $1,484 per benefit period, starting 2021
-Part B normally covers 80% of covered services; you pay the remaining 20%
Prescription Drugs
-Prescription medicines could be quite expensive to you even with Part D coverage
Dental, Vision and Hearing Care
-Original Medicare does not usually cover regular dental care, eye exams nor hearing aids
Long-Term Care
Medicare does not cover longterm custodial care. It can be the single biggest potential expense in retirement.
Overseas Healthcare
Generally, Medicare does not cover healthcare outside of the United States
Strategies for Managing Healthcare Costs in Retirement
Now that we have an idea of some of the costs that could arise, let’s explore ways to manage these costs effectively.
1. Start Saving Early
The earlier you start saving for healthcare costs in retirement, the better. Consider:
Max your 401(k) or IRA contributions
Catch up on 401(k) contributions if you’re 50 or older
Open an HSA if you’re eligible
2. Get Your Head Around Your Medicare Options
Carefully compare Original Medicare-with and without a Medigap policy-against Medicare Advantage plans. Consider such factors as:
Premium costs
Your individual health needs
Your personal physicians
Hospital access
Prescription drug coverage
How do these options mesh together?
Long-term care is likely to be one of the costliest aspects of retirement. The good news is that you can protect against this risk with long-term care insurance. Consider purchasing a policy in your 50s or early 60s while the premiums are lower.
4. Stay Healthy
Preventive care coupled with a healthy lifestyle has immense potential to save you from skyscraping healthcare expenses. Pay due attention to:
- Regular exercise
- Healthy diet
- Preventive screenings
- Stress management
5. Review and Optimize Your Coverage Annually
Healthcare needs and insurance options change. During Medicare’s annual enrollment period, review your coverage to ensure you have the most suitable and cost-effective plan available.
6. Know Your Employer’s Retiree Health Benefits
Some employers offer retiree health benefits. If that’s so, find out how those work with Medicare and may change in the future.
7. Consider Relocation
Health care costs are very different depending on where you live. If you can be flexible, you may want to retire in an area with lower health care costs.
The Role of Health Savings Accounts (HSAs) in Retirement Planning
Health Savings Accounts (HSAs) can be a powerful tool to plan eventual health care costs in retirement.
What Is an HSA?
An HSA is a tax-free savings account available to individuals enrolled in a high-deductible health plan (HDHP).
Benefits of HSAs
- Triple tax advantage: Contributions are tax-deductible, growth is tax-free and withdrawals for qualified medical expenses are tax-free
- No “use it or lose it” rule: Unused funds roll over year to year
- Can be used as an additional retirement savings vehicle after age 65
HSAs in Retirement
Can pay Medicare premiums (except Medigap)
Pay other qualified medical expenses tax-free
Can be used for non-medical expenses after 65, subject to income tax, but no penalty
How You Can Maximize Your HSA
Contribute the maximum allowable each year. For 2021 this is $3,600 for individuals and $7,200 for families, with a $1,000 catch-up contribution if age 55 or older. When at all possible, pay current medical expenses out-of-pocket and allow your HSA to grow towards retirement. Consider investing your HSA dollars for possible long-term growth.
Long-Term Care Planning
Long-term care tends to be the most neglected area of retirement planning, yet it can also have the potential to be one of the most significant areas of expense.
What is Long-Term Care?
Long-term care involves many services that enable a person to meet extended health or personal care needs. This could include nursing home care, assisted living facilities, in-home care, among other various services.
The Cost of Long-Term Care
Long-term care can be expensive. In 2020, national median costs were:
- $105,850 annually for a private room in a nursing home
- $51,600 annually for an assisted living facility
- $54,912 annually for a home health aide (44 hours per week)
Options for Paying for Long-Term Care
- Long-Term Care Insurance: May provide financing for long-term care expenses
- Hybrid Life Insurance Policies: Merges life insurance with long-term care benefits
- Self-Insuring: Paying for all expenses that may arise with one’s own savings and investments
- Medicaid: A governmental program that pays for long-term care expenses for people with limited income and assets
Things to Consider
When considering long-term care, think about:
- Your health and your family medical history
- Your potential support system-family members who may be able to care for you
- Your financial situation
- Your preferences for care
Chronic Conditions and Their Impact on Retirement Healthcare Costs
Chronic conditions can dramatically impact healthcare costs in retirement.
Pervasive Chronic Conditions among Retirees
- Heart disease
- Cancer
- Diabetes
- Arthritis
- Alzheimer’s disease
Controlling Chronic Condition Costs
- Emphasize preventive care and early diagnosis
- Take all medications as prescribed to avoid complications
- Research Medicare Advantage plans that offer supplemental benefits related to the management of chronic conditions
- Utilize patient assistance programs if expensive medications are required
Managing Healthcare Costs with Technology
Technology can help manage healthcare costs in retirement.
Telemedicine
- Can save money related to doctor visits
- Best utilized for minor ailments and follow-up appointments
Health and Fitness Apps
- Can incentivize healthy living to reduce healthcare utilization
- Many insurance plans incentivize discounts for utilizing health and fitness apps
Prescription Drug Comparison Tools
- Help find the best price for prescription drugs
- Some of these tools will also recommend therapeutic alternatives that may be less expensive
The Role of Healthcare Proxies and Advance Directives
While unrelated to actual costs, healthcare proxies and advance directives can help in decision making for healthcare and perhaps even help avoid unnecessary costs.
Healthcare Proxy
- Enables an individual to appoint someone to make decisions about their healthcare when they are no longer able to
Makes sure your wishes for healthcare are carried out
Advance Directive
- Outlines your medical treatment preferences based on a specific situation
- Has the potential to keep you from receiving unwanted and very expensive medical treatments
Keeping Up-to-Date: Resources for Healthcare Retirement Planning
It pays to keep up-to-date about your healthcare options and what they may cost. Here are some of the best resources:
- Medicare.gov: The U.S. government’s official site for Medicare
- SHIP: State Health Insurance Assistance Programs, free counseling and help with Medicare questions
- National Council on Aging: For resources related to aging and financial security
- AARP: For extensive information on healthcare in retirement
Conclusion
Healthcare in retirement can be quite expensive; however, it can easily be tamed through proper planning and understanding. You will be better equipped for healthcare expenses in retirement by starting to save early, understanding your options with Medicare, considering your needs for long-term care, and keeping abreast of the general trends and options in healthcare.
Remember, all people differ in their financial and health care needs. Your planning would have to be specific to your situation. Consider consulting an individual financial planning professional healthcare who specializes in retirement planning-so you can create a comprehensive plan that includes healthcare costs.
Last but not least, do not let the potential costs overshadow the plus side of retirement. You can take steps pre-emptively right now to make sure healthcare does not become a major source of stress in your retirement years. You can enter this new chapter in your life with confidence, knowing you’re prepared for whatever healthcare challenges come your way.
With proper planning in place and decisions made informatively, it is possible to maneuver through the complex landscape that is healthcare costs in retirement and protect both health and financial well-being during those golden years.
